Has Dotdigital turned a corner?

Dotdigital (DOTD) is a software platform that automates companies’ marketing communications. It will send out emails, for example, to remind people when they have abandoned a digital basket online. The software will also collate the data to give feedback on the success of different email campaigns.

The company benefited during the pandemic because its text message service was used by its clients to send out updates to customers. However, the loss of this business, coupled with a slowdown in the US market, hit the market's confidence in the company. Its share price is currently down 70 per cent from its 2022 peak.

Things seem to have returned to a steadier footing, however. The company is pushing its next-generation CXDP platform, and even managed to squeeze in a mention of its artificial intelligence capabilities in these figures. Average revenue per customer increased by 11 per cent. Adjusted cash profit increased by a more sedate 1.4 per cent as the company invested in extra headcount.

The strength of the business is that it is still strongly profitable with an adjusted cash profit margin just above 30 per cent and recurring revenue of over 90 per cent. It also turns all its profits into cash and has a strong balance sheet with over £50mn in net cash.

There is an argument that Dotdigital could be reaching a turning point. Many of its customers are ecommerce companies, many of which have struggled following the pandemic-linked boom. But things will turn eventually and Dotdigital’s strong cash position gives it headroom to invest.  

Broker Peel Hunt currently has it trading on a forward price/earnings ratio of 20, which is on the expensive side. However, strong cash generation means the free cash flow yield is an appealing 8 per cent. At that price, we are happy to move to hold. 

Last IC View: Sell, 74p, 3 Mar 2022